ARK Restaurants Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended June 27, 2020; filed August 11, 2020. The quarter was dominated by COVID-19 closures and restricted reopenings. The company operated 20 restaurants and bars, 17 fast-food concepts, and catering operations.
Financial performance and position
- Quarter revenue: $7.2 million, down 83.9% from $44.8 million a year earlier. Food and beverage same-store sales fell 84.2%.
- Quarter results: Operating loss was $5.6 million versus operating income of $4.7 million. Net loss attributable to Ark was $2.5 million, or $0.72 per share, versus net income of $4.0 million, or $1.14 per share.
- Year-to-date revenue: $84.7 million, down 29.8% from $120.7 million. Operating loss was $5.1 million versus operating income of $5.1 million; net loss attributable to Ark was $2.8 million, or $0.80 per share, versus net income of $3.2 million, or $0.93 per share.
- Costs and margins: In the quarter, payroll was 51.4% of revenue and occupancy expense 41.7%, compared with 33.2% and 9.5%, respectively, a year earlier. Management attributed the increased expense ratios largely to fixed and retained costs against sharply reduced sales. The company estimated COVID-related costs of $2.3 million for the quarter and $3.0 million year to date.
- Cash flow: The cash flow statement reports $2.5 million of cash used in operations for the 39 weeks, compared with $6.8 million provided a year earlier. Investing used $2.0 million; financing provided $18.0 million, principally from $15.0 million of PPP loans and additional credit-facility borrowings. Cash rose to $20.7 million from $7.2 million at fiscal year-end.
- Liquidity: Working capital was $5.6 million, versus a $4.4 million deficit at September 28, 2019. Management said cash and mitigation measures were expected to cover liquidity and capital needs through August 12, 2021.
- Debt and leases: Notes payable totaled $46.6 million before unamortized financing costs, including $15.0 million of PPP loans; the $9.7 million revolving facility was fully drawn, with no availability at quarter-end. Operating lease liabilities were $57.8 million, including $6.2 million current.
Material changes and notable items
- Government-mandated closures beginning in March sharply reduced sales. By quarter-end, various locations had reopened at limited capacity; some restaurants remained closed. Management reported further capacity restrictions in certain states but said these had not yet significantly affected overall sales trends.
- The company recorded a $364,000 lease-termination loss in the first half of fiscal 2020. The prior-year period included a $1.1 million Durgin-Park closure loss.
- A $3.2 million year-to-date income tax benefit reflected, among other things, anticipated carryback of 2020 tax losses under the CARES Act.
- The company adopted lease-accounting standard ASC 842 at the start of fiscal 2020, recognizing $62.3 million of right-of-use assets and $63.9 million of lease liabilities. Comparative periods were not restated.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance was provided. Management said the pandemic’s duration and ultimate effect remained uncertain, including how quickly all locations could reopen at full capacity and how quickly customers would return.
- Cost and cash-preservation measures included furloughs and pay reductions, deferred debt principal, relaxed bank covenants through fiscal Q3 2021, reduced capital spending, and suspended or deferred rent payments while seeking landlord concessions.
- The board canceled the previously declared $0.25 dividend on July 1, 2020. The company did not expect to pay quarterly cash dividends for the foreseeable future.
- PPP loan forgiveness was uncertain; any unforgiven amounts would require repayment. Landlord relief was not assured, and continued disruption could materially affect liquidity, results, asset recoverability, and debt-covenant compliance.
- The company recorded an accrual for a putative New York tipped-worker wage-and-hour class action; damages sought are unspecified. Management intends to defend the case.
Important facts for investors to verify
- Reconcile operating cash flow: the cash flow statement reports cash used of $2.510 million for the 39 weeks, while MD&A states $251,000 used.
- Track cash burn, reopening capacity and sales recovery, and whether management’s liquidity estimate remains achievable.
- Confirm PPP forgiveness outcomes, rent concessions, and the timing and terms of any deferred lease payments.
- Monitor debt maturities, covenant compliance after temporary relief ends, and the company’s ability to refinance or repay obligations.
- Assess potential further asset impairments and developments in the tipped-worker litigation.